I recently attended the CIFPs annual meeting where current trends in the industry where discussed. One of the topics was the strategic move to require all CFPs to put their clients’ interests first. On the surface, this seems like motherhood and apple pie. Beneath that surface, however, something far more contentious lurks.
I was the moderator for that particular session and the focus was the interplay between the considerations of transparency, client interest, informed consent and evidence-based research. The example that was used involved the impact of product costs on an investor’s long-term retirement projections and ultimate returns, of course.
I was shocked by the trite non sequiturs that were trotted out. One delegate was so bold as to suggest that product cost doesn’t matter much, because planning is much more important. To me, that’s like saying “a person can live a lot longer without water than without food, so having food doesn’t matter much”.
The thoughtful consideration of factual evidence was simply minimized by making an unnecessary comparison – and then dismissed entirely because it was deemed to be relatively less important. It’s like saying “Charles Manson isn’t such a bad guy when compared to Al Capone… so Charles Manson must be okay”.
Finding one thing that is relatively less important or objectionable doesn’t render the alternative totally meaningless.
I’m sure many readers (especially those who are not CFPs) might even actively dispute the assertion that planning isn’t necessarily more important than product cost. That’s their prerogative. To me, they’re both important, but their relative importance is not the issue. Putting one consideration ahead of another is no reason to totally dismiss the other.
There are many good reasons to unbundle advisor compensation, allowing for a more focused discussion around costs, the impact of costs and the disclosure of costs, including advisory fees.
First, unbundling is likely a necessary precondition in allowing advisors to utilize cheaper products. It also provides the transparency that embedded compensation cannot provide, as well as potential deductibility and it is a model that is more in keeping with more established professions like law and accounting. Finally, it eliminates all major elements of bias, including the mere perception of bias.
My understanding is that perhaps 15% to 20% of all Canadian advisors are now working on an asset-based fee model. That’s critical information. Based on the Law of Diffusion of Innovation, the innovators and early adopters have altered their business models in keeping with the new paradigm. We’re now at the tipping point where the early majority of advisors seem poised to make the transition to unbundling. When that happens, the late majority and the rest will have little alternative to be dragged (possibly kicking and screaming) into the professional paradigm. It seems inevitable.
Australia and the United Kingdom are both in various stages of a mandatory transition. I personally believe that Canada will be the last of the major English-speaking developed markets to make the transition mandatory, but I do think that day is coming.
People will make up all kinds of rationalizations about why this seemingly inexorable trend is unfair and unnecessary. Until then, they will rationalize their resistance. My view is that people who rationalize often tell rational lies. Those advisors who think change isn’t coming to Canada are only fooling themselves and changing the subject is not going to make it all go away.
In unrelated news, did anyone notice that Vanguard has announced they’re coming to Canada later this year?